State Investment Council decides to go after lost money

After months in the hot seat, including being the focus of two federal probes, the State Investment Council decided Tuesday to go after tens of millions of taxpayer dollars lost to potential fraud.

A request for proposals (RFP) will be sent out next month with the goal of hiring a firm by mid-September to lead the agency’s effort to recover lost taxpayer money, State Investment Officer Steven Moise said Tuesday.

With the State Investment Council’s decision, the agency joins a growing list of institutional investors across the country that are trying to recover money lost due to the recent meltdown in investment markets.

“I don’t know what the pipeline looks like,” Moise said. “We are going to move forward as quickly and as aggressively as possible from this point forward.”

Attorney General Gary King, with whom the SIC will work in recovering the money,  said Tuesday that New Mexico might find common cause with other states that have lost money and might join together to recover money.

“Some of these cases we’re looking at may be class action suits,” King told the Independent.

King said his office already is working on a couple of cases involving the recovery of lost taxpayer money due to investments that soured and that he envisioned working with the SIC on several fronts as that agency’s efforts ramped up.

“We may be looking for instances where we will be co-counsels,” King said.

Moise could not give a dollar amount of what his agency would seek to recover “because we are analyzing those right now,” he said.

But he said the agency would target taxpayer money lost due to potential fraud as well as money that went toward what is known as third-party placement fees. Those types of fees are paid to individuals who play matchmaker between institutional investors like the SIC and fund managers who are looking for investors in their funds.

The SIC has lost tens of millions of dollars in investments that went sour in recent years, some say because of fraud.

A whistle blower and former investment officer at the Educational Retirement Board, meanwhile, has pegged the loss of New Mexico public money lost due to potential fraud at more than $280 million.

The fees targeted for recovery could involve investments where the state lost money or fees that appear questionable, Moise added.

Moise said he didn’t know how much the firm his agency hires to lead the recovery effort will make, but he was emphatic that it would be much less than the 20 percent to 33 percent of the recovered funds firms typically make in such arrangements.

Decision to go after lost  money follows months of scrutiny

The agency’s decision to begin recovering lost money due to potential fraud comes after months of criticism about New Mexico’s inaction while at the same time the SIC has found itself engulfed in a full-blown scandal. The agency figures in investigations by both the U.S. Attorney’s Office and the federal Securities and Exchange Commission.

What had been concerns over lost taxpayer dollars during the economic downturn exploded into a full-blown scandal last fall when the state’s former investment adviser, Saul Meyer pleaded guilty to securities fraud in New York. Meyer advised the SIC and another state investment agency, the Educational Retirement Board.

In his pleadings Meyer admitted that on numerous occasions, contrary to his fiduciary duty to the state, his company had “recommended proposed investments that were pushed on him by politically-connected individuals in New Mexico.” Meyer went on to say in that statement he knew “that these politically-connected individuals or their associates stood to benefit financially or politically from the investments and that the investments were not necessarily in the best economic interest of New Mexico.”

Former State Investment Officer Gary Bland, who helped hire Meyer, resigned days after Meyer’s guilty plea and admission.

Meyer hasn’t named any of those politically connected individuals exerting pressure, but one man – Marc Correra – has attracted attention. Correra, the son of Anthony Correra, a friend and fundraiser for Gov. Bill Richardson, shared in $22 million of third-party placement fees in several investment deals involving the State Investment Council and the Educational Retirement Board. Some of those investments lost money.

No one in law enforcement has accused Correra of wrongdoing and his attorneys have said he worked hard for the money.

A complete reorganization

The extra scrutiny surrounding the SIC ultimately led to a wholesale re-organization of the agency during this year’s legislative session when state lawmakers passed a law making several changes to how the agency is run, including impaneling a new Council and changing how decisions are made.

Prior to the new law, virtually all decision-making authority in many matters was given to the State Investment Officer. Now that power rests with the new Council, which is composed of several veterans of the previous board as well as several newly appointed members.

The new Council wasted no time striking out in a new direction Tuesday. In addition to agreeing to try to recover money, the Council voted to reduce the percentage of its $14.1 billion portfolio invested in the stock market, from above 60 percent to around 55 percent.

At more than 60 percent, the Council’s exposure to public equity – or the stock market – put it in the Top 10 percent of endowments, Allan Martin of  New England Pension Consultants, one of the Council’s long-time advisers, told Council members.

“The portfolio has had too much exposure to equity and that is something you corrected today,” Martin said.

The council also voted to fire four firms managing funds for the agency. “Some were performance related. Some were changes in personnel. And there were other concerns,” Moise said after the meeting.

In addition to those actions, the council also is considering a new policy that changes last year’s complete ban on investing in funds that use third-party placement agents. That ban was imposed after it was discovered how much Marc Correra had shared in of third-party placement fees over a period of several years.

Under the proposal this change would allow the Council to invest funds that use third-party placement agents as long as the individuals are not representing funds in New Mexico trying to do business with the SIC, said SIC spokesman Charles Wollman.

“Right now the Council cannot invest in any fund that uses third-party placement fees without voting in special exemption, which has never been done,” Wollman said.

Rosalyn Nguyen, the SIC’s associate general counsel, told members Tuesday that the complete ban on investing in funds that use placement agents had prevented the SIC from some good investment opportunities.

The board likely will take that up at its next meeting, officials said.